Freelancers, consultants, gig workers, and small business owners do not get a workplace 401(k) handed to them, but they have access to some of the most generous retirement accounts in the tax code. The Simplified Employee Pension, better known as the SEP IRA, is one of the easiest to open and maintain. It lets a business put away a large percentage of compensation with almost no paperwork. This guide explains how it works, how to calculate contributions, and when another plan might be a better fit.
What a SEP IRA is
A SEP is an employer retirement plan in which the business makes contributions to traditional IRAs set up for each eligible worker, including the owner. The account itself is an ordinary traditional IRA that follows the usual IRA rules for investments, withdrawals, and required minimum distributions. What makes it special is the contribution limit, which is far higher than the standard IRA limit.
Only the employer contributes. Employees cannot make salary-deferral contributions to a SEP the way they would with a 401(k). For a one-person business, of course, the owner is both the employer and the employee, so the distinction mainly matters once you hire staff.
Who can open one
Almost any business can establish a SEP: sole proprietors, single-member LLCs, partnerships, S corporations, C corporations, and even people with self-employment income on the side while holding a regular job. Side income from freelance writing, rideshare driving, or consulting can qualify, as long as it is reported as self-employment or business income.
Contribution limits
The employer can contribute up to the lesser of 25% of an employee’s compensation or an annual dollar cap. The dollar cap is tied to the Internal Revenue Code Section 415(c) limit, which is adjusted for inflation. For 2025 the cap was $70,000, and the IRS raised it to $72,000 for 2026. The amount of compensation that can be considered is also capped, at $350,000 for 2025 and $360,000 for 2026. Check the IRS retirement plan limits page each year, since these numbers change.
There is no catch-up contribution in a SEP for people age 50 and older, which is one difference from 401(k) plans.
The self-employed calculation
For sole proprietors and partners, the 25% figure is misleading because compensation is defined as net earnings from self-employment after subtracting half of self-employment tax and the SEP contribution itself. The practical effect is that the maximum contribution works out to roughly 20% of net self-employment profit, not 25%.
Here is a simplified example. A consultant has $100,000 of net profit on Schedule C. Self-employment tax is about $14,130, and half of that, about $7,065, is deductible. That leaves $92,935. Multiplying by 20% gives a maximum SEP contribution of roughly $18,587. IRS Publication 560 contains worksheets and a rate table for this calculation, and most tax software performs it automatically.
For corporations
If you operate as an S corporation or C corporation and pay yourself a W-2 salary, the contribution is 25% of that W-2 wage. Distributions from an S corporation do not count as compensation, so an owner who pays a low salary also limits the SEP contribution.
The employee coverage rule
A SEP is simple partly because the rules are rigid. If you have employees, you must contribute the same percentage of pay for every eligible employee that you contribute for yourself. If you put in 15% for yourself, every eligible worker gets 15% too.
An employer may require that a worker meet the following before becoming eligible, but cannot impose stricter requirements:
- Be at least 21 years old.
- Have worked for the business in at least three of the last five years.
- Have received at least a minimum amount of compensation for the year, a small indexed figure ($750 for 2025).
Contributions are immediately 100% vested. Employees own the money as soon as it lands in their IRA. For a business with several staff, this can make a SEP expensive, and a 401(k) or SIMPLE IRA may be more economical.
Flexibility year to year
One of the biggest advantages is that contributions are discretionary. You can contribute the maximum in a strong year, a small amount in an average year, and nothing at all in a lean year. There is no required annual funding. When you do contribute, however, the uniform percentage rule applies to everyone eligible.
Deadlines
You can establish and fund a SEP as late as the due date of the business’s tax return, including extensions. For a sole proprietor filing on the calendar year, that typically means April 15, or October 15 with an extension. This makes the SEP useful for last-minute tax planning: once you know how profitable the year was, you can still open an account and reduce taxable income.
Tax benefits
Contributions are deductible by the business. For a sole proprietor, the deduction appears on Schedule 1 of Form 1040, reducing adjusted gross income. It does not reduce self-employment tax, however. Money in the account grows tax-deferred, and withdrawals in retirement are taxed as ordinary income.
Many custodians also allow a Roth SEP option, made possible by the SECURE 2.0 Act. Roth contributions are not deductible now but can be withdrawn tax-free later if the rules are met. Availability varies by provider.
How to open a SEP IRA
- Choose a provider. Major brokerages and many banks offer SEP IRAs with no setup fees.
- Adopt the plan document. Most people use IRS Form 5305-SEP, a model agreement that you sign and keep in your records. It is not filed with the IRS.
- Give employees notice. Each eligible employee receives a copy of the plan information.
- Open an account for each participant. This is usually done online.
- Contribute by the tax filing deadline and report the deduction on your return.
There is generally no annual Form 5500 filing for a SEP, which is a major reason it is popular with small firms.
Withdrawal rules
Because the account is a traditional IRA, withdrawals before age 59½ are generally subject to a 10% additional tax on top of ordinary income tax, unless an exception applies. Required minimum distributions begin at age 73 for people reaching that age under current law. You can roll SEP money to another traditional IRA or, in many cases, into an employer plan that accepts rollovers.
SEP IRA versus solo 401(k)
The main alternative for self-employed people with no employees is the solo 401(k). Both have the same overall annual cap, but they reach it differently.
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Who contributes | Employer only | Employee deferral plus employer |
| Catch-up contributions | No | Yes, for age 50+ |
| Loans | Not allowed | Often allowed |
| Roth option | Depends on provider | Commonly available |
| Paperwork | Very light | Form 5500-EZ once assets exceed $250,000 |
| Setup deadline | Tax filing date with extensions | Generally earlier for employee deferrals |
The solo 401(k) usually allows a larger contribution at moderate income levels because the employee deferral portion is not tied to a percentage of profit. At the example $100,000 profit, a solo 401(k) could allow the full employee deferral plus the employer portion, far more than the roughly $18,600 SEP limit. At very high incomes, both can reach the same maximum.
Other considerations
- Pro-rata rule. SEP IRA balances count as traditional IRA money for the pro-rata calculation if you ever do a backdoor Roth contribution. A large SEP balance can make backdoor Roth conversions partially taxable.
- Combining plans. If you also have a 401(k) at a day job, your employee deferrals there do not reduce your SEP limit, because the SEP limit is separate per employer. The 415(c) limit applies per unrelated employer.
- Hiring later. Plan ahead before adding staff, since you will need to contribute for eligible employees once they meet the requirements you set.
Is a SEP IRA right for you?
A SEP is a strong choice if you are self-employed with no employees or a few employees, have income that varies from year to year, value simplicity, and want to decide on contributions after the year ends. If you want to maximize savings at moderate income, want catch-up contributions, or want loan access, compare a solo 401(k). A tax professional can run both calculations using your actual numbers.
Related reading: Solo 401(k): Contribution Rules for Self-Employed Savers.
Frequently Asked Questions
How much can I contribute to a SEP IRA?
Up to 25% of compensation, capped at the annual 415(c) limit ($72,000 for 2026). For sole proprietors, the effective maximum is about 20% of net self-employment profit after the required adjustments.
Can I have a SEP IRA and a 401(k) at work?
Yes. A SEP tied to your side business is separate from an employer 401(k), and contributions to one generally do not reduce the limit for the other when the employers are unrelated.
What is the deadline to open and fund a SEP IRA?
You can set up and contribute until the due date of your business tax return, including extensions.
Do I have to contribute for my employees?
If you contribute for yourself, you must contribute the same percentage of compensation for every eligible employee, and those contributions are immediately vested.
Is there a catch-up contribution for people over 50?
No. SEP IRAs do not allow age-based catch-up contributions, although a solo 401(k) does.
This article is for general informational purposes only and is not legal, medical, tax, or financial advice. Rules vary by state and change over time; confirm details with the relevant agency or a licensed professional.
